Investing for Beginners (cont'd)
by: Dr. Boyce Watkins

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6)      If a stock has done well in the past, it is going to keep doing well in the future.

Remember what I said about not being able to predict the stock market?  I have done a ton of research on stocks and the market, and I can tell you that PAST PERFORMANCE HAS VERY LITTLE TO DO WITH FUTURE PERFORMANCE, ESPECIALLY WHEN REFERRING TO INDIVIDUAL STOCKS.  Sure, there are some trends that I have uncovered throughout the years, such as the fact that buying into the market after a downturn usually makes money in the future.  But this does NOT apply to individual stocks, so that stock that goes down may continue going down, no matter what the rest of the market is doing.  

7)      If I invest, I should watch my stocks every single day

Your stock portfolio is like a clock:  the more you watch it, the more you stress yourself out.  Your money is not going to grow by the second, it is going to grow over time.  Watching it every day or every second of the day is going to make you make you feel stressed out, and you are going to find your emotional status going up and down with the market.  You should be happy about being in the stock market, and being invested.  That is without regard to whether stocks go up or down.  Why are you happy?  Because in the long-run, you are GOING TO MAKE MONEY.  End of story.  Get a well-diversified portfolio, check it every week or two, or even every month.  Watch yourself get a little bit wealthier every year.

8)      Its ok for me to put all of my money into CDs and other risk-free investments

A lot of people avoid the stock market because they are afraid of risk.  What is risk?  The risk is the chance that you are going to lose money.  But the problem with that statement is that if you are invested in a diversified portfolio for the long-term, there is little or no chance of you losing all of your money.   So, historically speaking, if a person invested before the Great Depression, and put their money into many different kinds of stocks in various industries, and also put money into bonds, international stocks, and real estate, that person would have a lot of money today, even though they invested right before or right in the Great Depression.  Why?  Because what goes down usually comes back up, especially when you are talking about the entire market.

Why is it dangerous to put all of your money into CDs and risk-free assets?  Because if this same person mentioned above was afraid of risk and put all their money into risk-free assets, they would find that their money has not risen much faster than the rate of inflation.  So, a person putting all their money into CDs in order to avoid the risk of the Great Depression, would be making a HUGE financial mistake.

9)      I don’t need to invest

You should think of money as a tool.  Not only is it a tool, but it is a tool eroding in value every single year.  Inflation eats away at your cash, till the point that it’s worth much less than it was before.  Imagine if someone gave you $10,000 and you put it in your mattress in order to save for retirement.  By the time you retire 20 or 30 years later, that $10,000 has turned into $3,000 or so, and you haven’t done anything wrong. 

Investing helps you to avoid this problem.  Your money is like a car you have in your driveway.  If you let it sit there, it is going to rust and get old.  So, if you are smart, you will use the car, perhaps to deliver pizzas or go to work every day, that way, you are getting a return on your investment.  So, everyone needs to invest their money.

10)      If my home value is growing every year, I do not need to save or invest my cash

Having a home is very important, and it is one of the greatest sources of wealth creation in the country.  However, it is simply one form of wealth building, and by only investing in your home, you are putting yourself at risk again. If something happens and the value of your home does not continue to grow, you are in big trouble.  Also, having a home may not provide the immediate liquidity you need, especially if you have already taken out lines of credit against your current equity.  Every family should have cash available for emergencies, something that they can reach in a very short amount of time.  You should also have investments in areas other than real estate.

 

 

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